Surprised by the Parimutuel Odds?
Ottaviani, Marco, and
Peter Norman Sørensen. 2009. "Surprised by the Parimutuel Odds?."
American Economic Review,
Empirical analyses of parimutuel betting markets have documented that market probabilities of favorites (longshots) tend to underestimate (overestimate) the corresponding empirical probabilities. We argue that this favorite-longshot bias is consistent with bettors taking simultaneous positions on the basis of private information about the likelihood of different outcomes. The ex post realization of a high market probability indicates favorable information about the occurrence of an outcome -- and the opposite is true for longshots. This explanation for the bias relies on the bettors' inability to incorporate the surprise revealed by the final odds. (JEL D81, D82, L83)
Article Full-Text Access
Ottaviani, Marco (Northwestern U)
Sørensen, Peter Norman (U Copenhagen)
D81: Criteria for Decision-Making under Risk and Uncertainty
D82: Asymmetric and Private Information
L83: Sports; Gambling; Recreation; Tourism